The Optimists Continue to Hold an Edge

by Nick WilletTwo
Plus Two Magazine, Vol. 14, No. 5

In 2002, Elroy Dimson, Paul Marsh, and Mike Staunton authored the book Triumph of the Optimists. The 320-page title examined asset returns worldwide from 1900 to 2001. It was valuable in that given the turmoil of the 20th century a reader could examine returns and popular strategies worldwide. This was important because investors tend to have a home country bias. In the United States, market returns are often quoted as if they are laws of nature. You see this in relation to risk and twenty-year returns. Advisors and authors often act like it is impossible to lose money over this time period.

The country returns stated in Triumph of the Optimists will quickly disabuse you of this thought. But, the book is titled the way it is for a reason. Those with a long term positive view on equities over the century did well. A very useful section is the detailed coverage of 16 countries that make up the second part of the book. The chapters give a deep understanding of just what kind of risk factors an investor faces over time. They also give evidence that change is a constant in life. The book is still available at Amazon in hardcover and was over $100 new the last I looked. It is also available as an electronic book.

Credit Suisse Yearbook

An interesting addendum to this is that the authors update the material each year in The Credit Suisse Global Investment Returns Yearbook. The bad news is that this report is not something that can be purchased by retail investors. This is disappointing because the authors highlight different variables in their database each year, expanding and updating on the ideas from the book.

By doing a web search for previous years, and focusing on the Credit Suisse site, highlights and the PDF summary books can be easily located.

Some previous years summaries have been posted on Scribd (www.scribd.com) or may be found through a web search. Scribd offers a large amount of media in many different formats for $8.99 per month. The service offers a 30-day trial.

Since the data comes from a global perspective, many important theories from behavioral finance to factor investing get a more thorough test than you usually see.

The 2009 version of the yearbook offered an antidote to the gloomy view at the time by comparing poor worldwide returns with the long view. Like many other facets of life, the market has seasons, and the long run returns in equities have been good.

In 2011, there was a section on drawdowns in real dollar terms, and the report traces how bad it has been at times for the United States and United Kingdom throughout the years. There was also a section on investing for dividend yield and the premium the strategy has returned across the spectrum of countries.

2012 brought a detailed look at the effects of inflation and currency on investments. The data presented shows inflation’s negative impact on equity returns. The authors also examine the effects of hedging portfolios for currency risk.

2015 noted the changing nature of industry over the last century as well as an examination of vice/virtue and the subject of social responsibility in investing.

In 2016, the authors did a deep dive into interest rates, looking at rate hikes in major markets and worldwide. Unexpected rate hikes were seen as having the greatest impact on equities. Interest rate cycles were also examined in detail, with coverage of the most impactful rate environments in over a century of data.

Each year country data is updated, with new charts on the changing nature of worldwide markets. The 2017 summary goes in to great detail here, with tables showing real returns over the entire time period for each country, with the best and worst years.

The author’s work has also highlighted the strength of small cap and value stocks in the United States market as separate factors and in combination.

This is also a chance to put in another plug for the Kenneth French data library. Dimson, Marsh, and Staunton employ the data in some of the analyses and you should too. Beyond monthly or quarterly returns for size, value, momentum and quality factors, there is a great deal of international data. Factor information is available for European, Japanese, other Asia Pacific, and North American markets. The data is available in flat file text format, easily imported into spreadsheets or desktop databases.

2018 Summary

I have always been a fan of extremely useful information that is available at no cost. Like the Berkshire annual reports and SPIVA data (compares active investors to indices) , the Credit Suisse summaries offer investors the experience of how returns played out over long time periods without having to live through the actual events. The 2018 Global Investment Returns Yearbook summary is 43 pages long and contains many of the tables and graphs that make the original book so useful.

One insight that is clear from examining the full results from 1900 to 2017, is that the United States returns over this period for equities ranks near the top of countries studied. Far from expecting a repeat of history, investors should evaluate what will happen to their portfolio if future returns are in the middle of the pack.

Collectibles

A new addition this year is the asset class of non-traditional investments. The authors have compiled data on such diverse assets as books, violins, classic cars, wine, furniture, art, and stamps. This is interesting because these types of investments are usually only discussed anecdotally. The price of a stamp, comic book, or baseball card will be analyzed. The resulting impression will be one of a fantastic investment. Baseball cards are always good for a story because children of the fifties and sixties will always swear they owned that Mickey Mantle rookie card now worth millions. (Indeed, one sold for $2.88 million in late April.) It is a life changing score that was available to anyone.

Art on the other hand is only available to someone with a lot of extra money to play around with.

The detail includes the size of these markets compared to traditional investments. In the end, the non-traditional investments underperform equities but outperform bonds, hard assets, and cash. They are also much more volatile than traditional investments. For those who find themselves watching automobile auctions or dream of restoring muscle cars, this sector had the best collectible return based on data from 1980 to 2017.

The worst return belonged to rare books, which is disappointing to anyone who appreciates the value of the written word.

The authors also delve into the realm of housing. Like collectibles, perception is often tainted by the anecdotal evidence. For those who live in Southern California or just read the Los Angeles Times, each Saturday brings a huge section highlighting real estate and homes. The median price of a single-family home in California has nearly doubled in the last six years and is now well over half a million dollars. You’ll see articles like one devoted to a beach house the child actress Eve Plumb bought as an 11-year-old for $55,000. Forty-Seven years later it sold for close to $4 million. Again, life changing returns. (But in this case if you do the math, achievable by a very good investor.) The Wall Street Journal also has a section devoted to high end housing on each Friday.

The Yearbook Summary examines residential housing data over 11 countries from 1900 to 2017. The real return generated comes to 1.3 percent per year with the United States trailing the pack. It does make you look at the success stories with a more skeptical eye.

Conclusion

In this article, we examined the utility of Credit Suisse’s yearly report of Dimson, Marsh, and Staunton’s continuing work examining asset classes from over a century of data. For those worried about a home bias in their investments, it offers a deeper and broad ranged perspective from which to make decisions.

Each year this work is updated. Summaries and slides are made available online. Combined with the original book the material represents an evolving study of the world’s markets since the dawn of the twentieth century. Collecting the summary PDFs each year results in one large and dynamic volume of worldwide market history. In researching possible future scenarios, history is always a useful guide, and there is a lot of it here.